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Monday, August 07, 2006
Oil Prices

JPC - I've been meaning to ask this before the Alaska pipeline issue came about, but:

1. How long will prices remain high? (I already know the 'As a percent of income, it's still not as high as...' stuff). But when will prices come down?

2. Will this put more pressure for domestic drilling? Any chance of success?

3. What is the 'Inside Scoop' that the oil industry is seeing (which may affect us guys working hard to pay the oil/gas bills) Should we be concerned about more issues coming?

4. Is ethanol or any other substitute gaining traction?

Sip - Good questions. I'll do my best to answer them.

1.) I don't expect prices to ever come down. There is potential for them to stabilize, but there are so many factors affecting the global market for oil and gas I don't expect it to happen.

Two best things that can happen - a) increase supply, preferably domestically. b) Reduce demand. Detroit fights this like crazy (they are only competitive in the SUV market), as do most Americans. The truth is that CAFE (corporate average fuel economy) standards for autos have not changed since the early '80s. The fleet of cars on the road today has worse gas mileage than 1980. We can and should demand to do better.

The best way to address a and b above is through improved technology. Toyota is making huge advances in the hybrid area and I wouldn'tbe surprised if we see autos that get 150 mpg in the next decade or less. Tech is also the way to lighten vehicles while keeping them safe. While ethanol is not the way to go (more on that in #4) there is a belief that scientists are close to finding the one enzynme that will break down cellulose and make ethanol conversion viable and the fuel economical.

2.) The BP situation will put more pressure on domestic drilling, but also arms the enviros with another arrow in their quiver. Its a draw.

3.) The Inside Scoop:
- Companies predict that U.S. oil usage will start to level out and begin to drop off starting in early 2020's.
- Oil and gas industry's tech is improving by leaps and bounds, unfortunately we can't use it as much as we'd like in the U.S. We can find more oil, produce and refine it in a more efficiently, safer and environmentally friendly than ever before.
- The investment in refineries is moving to other countries, due to massive growth in energy markets overseas, primarily in Asia, and because of NIMBYism in the U.S.
- Global instability (like Venezuela, Middle East, Nigeria etc.) will continue to have a dramatic effect the price of oil and gas in the U.S. for many years, especially as markets grow in other countries and competition increases.
- U.S. is the biggest market for oil and gas, yet China and India have the greatest growth and other countries are not far behind.
- Only 6% of the world's oil and gas production is owned by private companies. All the rest is owned by state run oil and gas companies or joint ventures. That is the field that Exxon, BP, Shell, Chevron, Conoco, etc. is competing in.
- Corn based ethanol is not a viable alternative.
- Brazil didn't become energy independant because of their policies to develop their sugar cane ethanol industry. They became energy independant because they increase their offshore oil production (hmmmm - lesson there?). Brazil's increase in crude oil production was four times greater than its increase in ethanol production from '00-'05 and nine times from '04-'05. They also have required that gasoline contain 25% of ethanol, but recently reduce that amount because of increase in global sugar prices. Brazilian gasoline demand was 6.2 billion gallons in 2005, including ethanol - the U.S. was 140 billion gallons including ethanol in 2005. Granted they have a developing command and control economy that put the pro-ethanol policies in place back in the late 1970's, but they aren't energy independant because of ethanol as the enviros and pro-ethanol people will tell you.
- Hybrids will/could have a greater impact on gas consumption in this country than other technologies or policies. (see above).
- Oil and gas companies invested $98 billion in U.S. alternative energy research and projects in '00 to '05, or 73% of the total amount invested. Other investments totaled $32b. (23%) and the fed kicked in $5b. (4%).
- Oil and gas industry revenues may be high, but so is the cost of reinvestment to find and produce oil. First quarter 2006 earnings for the oil and gas industry is 8.5 cents per dollar of sale, which is BELOW the All Manufacturing Corporations average of 8.9 cents per dollar. Other examples for the same quareter are: Pharmaceuticals 28.9 cents per dollar. Beverage and tobacco 18.9 cents. Computer and electronic products 12.0. The 10yr. average return on investment for S&P Industrials is 13.9, oil and gas production is 11.7, and refining and marketing is 7.7.
- 41% of stock in oil and gas companies is owned by pension plans and retirement accounts.

4.) Ethanol is only gaining traction because of our (socialist) government policies supporting it ie. 51 cent per gallon price support, 54 cent per gallon tariff, and a mandate that the oil companies (and Americans) use 4 billion gallons this year, with an increasing amount to 7.5 billion gallons in 2010. As mentioned above, a break through in technology (that one elusive enzyme) could make non-corn based ethanol a viable alternative at some time.
I'll bring up hybrids here again as the most viable way to reduce American gas consumption and dependance on foreign oil and stabilize prices. Others (hydrogen, ethanol) depend on huge new investments in infrastructure to convert, transport, store, and put the fuel in the vehicles. Ethanol is also tied to the global commodities markets like oil. The hybrid technology is far more advanced than any other alternatives and doesn't require any investment in new infrastructure - you simply fill up your tank at the gas station as you always do.
A very interesting read. Thanks for the info.
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